ARTICLE
18 April 2024

Does Supreme Court Define Powers Available To Court Under Section 37 Of The Arbitration & Conciliation Act, 1996

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Singhania & Partners LLP

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Singhania & Partners is a full-service law firm with offices in Delhi- NCR, Bengaluru, Hyderabad and Gurugram. The firm assists clients in domestic and international dispute resolution, project finance, M&A, employment and intellectual property areas. It is the Indian member of TerraLex, Inc. (USA) which is a global network of 600+ Law Firms offices in 100+ countries.
In a recent judgement, the Hon'ble Supreme Court, in the matter of S.V. Samudram vs. State of Karnataka & Another, set aside an order and judgment dated 07.02.2017 passed by the Hon'ble High Court of Karnataka under Section 37 of the Arbitration & Conciliation Act, 1996.
India Litigation, Mediation & Arbitration
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In a recent judgement, the Hon'ble Supreme Court ("SC"), in the matter of S.V. Samudram vs. State of Karnataka & Another,1set aside an order and judgment dated 07.02.2017 passed by the Hon'ble High Court of Karnataka ("HC") under Section 37 of the Arbitration & Conciliation Act, 1996 ("Act"). The issue was concerning a challenge to an arbitral award, which was accepted by the courts below. The court under Section 34 of the Act modified the arbitral award dated 18.02.2003 ("Award"), which was affirmed by the HC under Section 37 of the Act. However, the SC restored the Award with the finding that both the courts below had failed to limit themselves within the contours of Section 34 and Section 37 of the Act, respectively. The question framed by the SC for its decision, was as under:

"Whether the High Court was justified in confirming the order dated 22nd April, 2010 under Section 34 of the Arbitration and Conciliation Act, 1996 passed by the Senior Civil Judge, Sirsi, in Civil Misc. No. 08/2003, whereby the award passed by the learned Arbitrator was modified and the amount awarded was reduced."

Factual Background

The dispute had arisen from a contract executed between the parties on 29.01.1990 where the appellant was to construct the office and residence of the Chief Conservator of Forests at Sirsi within a period of 18 months from the date of the agreement excluding the monsoon season. The disputes were referred for adjudication to a sole arbitrator, who was appointed on 30.07.2002. The sole arbitrator, after conducting the arbitration proceedings, awarded a sum of Rs. 14.18 lacs against seven out of nine claims made by the claimant/appellant, besides awarding interest at 18% per annum from 09.03.1994 till the date of payment and a sum of Rs. 50,000/- towards the cost, in favour of the claimant/appellant.

The Award was subjected to a challenge under Section 34 of the Act. After consideration of the challenge, the court modified the Award and directed for payment of Rs. 3,71,564/- (25% of the tender amount) against the seven claims allowed by the arbitrator along with the costs quantified at Rs. 10,000/-. The court further directed for reduction of interest to 9% p.a. as against 18% p.a. awarded by the arbitrator.

Appeal filed by the appellant before the HC under Section 37 of the Act, remained unsuccessful and the Award, as modified by the court under Section 34 of the Act, was confirmed by the HC.

Decision of the Supreme Court of India

The SC held that the courts below had failed to ensure compliance with well laid out parameters and contours of bothSection 34andSection 37of the Act, respectively. It was held that the judgment dated 22.04.2010 passed by the court under Section 34 of the Act failed to reflect fidelity to the text of the statute and did not explain under which of the grounds mentioned underSection 34of the Act, did the court find sufficient reason to intervene. The court under Section 34 of the Act was in fact found to have gone contrary to the ambit of Section 34 by undertaking reappreciation of the matter and modifying the Award on its own view of evidence. Criticizing some of the findings of the court under Section 34 to be scandalous and preposterous, the SC held that it was a clear instance of the court supplanting its view in place of the arbitrator's, which is an impermissible exercise and is completely dehors the jurisdiction underSection 34 of the Act. With the aforesaid reasoning, the SC held that order passed by the court under Section 34 does not stand scrutiny and must be set aside.

With respect to the judgment passed by the HC, the SC observed that even the HC did not act within the contours of Section 37 of the Act. It was held that the judgment of the HC reads like a judgment rendered by an appellate court for whom re-examination of merits is open to be taken as the course of action. The SC further held that the HC's finding that the Award was "perverse and contrary to the public policy" was not based on any finding backed by material on record. The SC held that the HC's decision appeared to be based on its finding that the factoring of the cost escalation between the years 1989-90 and 1992 by 100%, was exaggerated. However, the SC held that, the HC failed to consider that equally there was no justification in granting lump sum escalation by the court under Section 34 by 25% of the contract value. The SC held that the parties were governed by the terms and conditions and the price escalation stood justified by the claimant/appellant based on cogent and reliable material which was considered by the arbitrator in partly accepting and/or rejecting the claims.

The SC further held that while affirming modification of award, the HC committed same mistake, which was made by the court under Section 34 of the Act.

The SC held that though the HC recorded that the arbitrator has awarded the claims (Claim No. 3 and 7 particularly) without satisfactory material having been placed on record and held the Award to be perverse and contrary to public policy, however, there is no discussion about the evidence, if any, available before the HC to arrive at such a conclusion. The SC held that the course of action adopted by the HC was without any reference to the scope delineated by various judgments of the SC as also the statutory scheme of the Act. The SC further held that the HC's finding that the Award was "patently illegal, unreasonable, contrary to public policy"is without any reasons.

The SC also referred to, and followed, its several judgments where it was held that to "modify an award" under Section 34 would amount to "crossing the Lakshman Rekha".

The SC further held in para 71 of the judgment that "The Court underSection 37 had only three options: –

(a) Confirming the award of the Arbitrator;

(b) Setting aside the award as modified underSection 34; and

(c) Rejecting the application(s) underSection 34and37."

Finally, the SC directed for setting aside of the judgments passed by courts below and for restoration of the Award.

CONCLUSION:

Undoubtedly, the above judgment of the Apex Court is in line with the several precedents defining the limited scope of scrutiny of arbitral awards under Sections 34 and 37 of the Act. The judgment is an important reminder to the courts exercising powers under Section 34 or Section 37 of the Act, that mere use of the expression "patent illegality", "contrary to public policy" and "perversity", without any supportive reasoning, is not sufficient to set aside the award. Further, it reiterated that modification of an arbitral award is not permissible while considering a challenge to the arbitral award.

However, the observations of the SC in para 71 of the judgment regarding the options the HC had under Section 37 of the Act, is something that needs deliberation. Did, by the said observation, the SC define the scope of power that a court can exercise under Section 37? Or were those observations made by the SC in the specific circumstances of the case before it?

On one hand, it may be argued that the observations in para 71 of the judgement were made in the facts of the case before the SC, however, it may also be argued that SC's aforesaid findings were an expression of the law in general. In the former case, further issue to be examined is whether the SC findings require any clarification. Whereas, in the latter case, the further question to be pondered upon is whether the finding of the SC truly reflects the full scope of appeal under Section 37, which provides that the appeal under Section 37(1)(c) lies against an order "of setting aside or refusing to set aside an arbitral award under Section 34".

The scope of power under Section 37(1)(c) is expressly stated in the said provision. It enables the appellate court to examine whether the court under Section 34 of the Act has exercised the powers with reference to the scope delineated by various judicial pronouncements as also the statutory scheme of the Act. However, on reading of para 71 of the judgment, it appears that the findings therein do not cover a situation where a court, under Section 37, could direct for setting aside of arbitral awards that remained untouched under Section 34. Reason being, the first two findings in para 71 i.e., (a) & (b) talk about affirming the award and setting aside of modified awards, respectively. What about a situation where setting aside of the awards, which were not modified but were affirmed under Section 34 of the Act, is found the correct course to be adopted by the court under Section 37 of the Act.

Further, "rejecting the applications under Section 34" is not something which an appellate court does under Section 37. In fact, the appellate court simply rejects or affirms the order passed under Section 34 (and not the application made under Section 34).

A deeper scrutiny of the judgment would reveal that SC's findings in para 71 were specific to the facts and circumstances of the case before it and were not to define the scope of appellate court's power under Section 37, in general. This is so for the following reasons:

  • The question before the SC was 'whether the HC in an appeal was justified in confirming the order of modification of the award by the court under Section 34'. The SC was not considering the scope of powers that appellate court can exercise in general under Section 37.
  • The situations where awards are modified under Section 34 are very few and was peculiar to this case before the SC. Courts refrain from modifying the award under Section 34 because that is not permissible in law.
  • In the immediately preceding para, i.e. para 70 of the judgment, the SC held that "in our considered opinion, the court while confirming the modification of the award committed the very same mistake which the Court under Section 34 of the A&C Act, made." This is to be read with para 33 to 35 to the judgment where the SC has cited with concurrence, its earlier judgments holding that modification of award under Section 34 is not permissible.
  • The first sentence of para 71 of the judgment is informative when it says "The Court under Section 37 had only three options" (emphasis supplied). Unquestionably in this sentence the SC refers to what the HC could have done under Section 37 of the Act, in the matter before it. It does not describe the power of courts under Section 37, in general.
  • Also, the three findings of the SC, are relatable to the options available to the court under Section 37 , only in the facts of the case before it:
  1. confirming the award of the arbitrator (meaning thereby that by allowing the appeal and setting aside the order passed by the court under section 34, the Award as passed by the arbitrator is restored fully).
  2. setting aside the award as a modified by the court under Section 34 (meaning thereby that in the appeal, the court not only sets aside is the order passed under Section 34, but also sets aside the Award as passed by the arbitrator).
  3. Rejecting the application(s) under Section 34 & 37 (Rejecting the appeal, thereby maintaining the modified Award passed under Section 34. This could be done merely by rejecting the appeal under Section 37. Rejection of 34 was not required).

The only noticeable expression used by the SC in the third finding is "rejecting applications under section 34 and 37" (emphasis supplied). A literal meaning of this expression is that SC held, in the facts of the case, that HC could have rejected both the applications i.e., the application under Section 34 and the application under Section 37 of the Act, because of use of the expression "and". However, in the case before the SC, it was not possible for the HC to reject both the applications i.e., the application under Section 34 and the application under Section 37 of the Act, the reason being that the application Section 34 application was in fact allowed, leading to modification of the Award. If the effect of the order passed under Section 34 was to be undone, appeal must have been allowed and cannot be rejected. Similarly, reading the expressions used in the third finding disjunctively / independently would lead to anomalous results i.e., 'rejection of application under Section 34' would result in affirmation of the Award (which was a situation already covered by para 71(a) of the judgment and hence there was no need of repeating the same in the third finding), whereas 'rejection of application under Section 37' (i.e., appeal) would result in affirmation of order passed under Section 34 and thereby, affirming the modified Award.

Keeping in mind the only available third option (i.e., rejecting the appeal thereby sustaining the Award as modified under Section 34), it appears that the SC in its third finding simply meant "Rejecting the application under Section 37" and use of the expression 'Rejecting the application under section 34' appears to be inadvertent oversight or surplusage.Also to be borne in mind is that in the facts of the case, HC had rejected the appeal and affirmed the order passed under Section 34. However, that was not permissible in view of the legal position cited by the SC in paras 33 to 35 of the judgement. For that reasons, even if legally speaking the option of rejecting the appeal was available in this case with the HC, the said recourse, as adopted by the HC, did not meet the sanction of the SC. Hopefully, necessary clarification would be issued by the SC in future and till then the judgement would be read as having been passed in the facts of the case and not defining the scope of powers available to the courts under Section 37, in general.

Footnote

1 2024 SCC OnLine SC 19

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
18 April 2024

Does Supreme Court Define Powers Available To Court Under Section 37 Of The Arbitration & Conciliation Act, 1996

India Litigation, Mediation & Arbitration

Contributor

Singhania & Partners is a full-service law firm with offices in Delhi- NCR, Bengaluru, Hyderabad and Gurugram. The firm assists clients in domestic and international dispute resolution, project finance, M&A, employment and intellectual property areas. It is the Indian member of TerraLex, Inc. (USA) which is a global network of 600+ Law Firms offices in 100+ countries.
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